SOUTHERN MISSOURI BANCORP, INC. - Quarter Report: 2005 December (Form 10-Q)

Generally accepted accounting principles are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. Management of the Company must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of the Company's significant accounting policies, see "Notes to the Consolidated Financial Statements" in the Company's 2005 Annual Report. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Management has reviewed the application of these policies with the Audit Committee of the Company's Board of Directors. For a discussion of applying critical accounting policies, see "Critical Accounting Policies" beginning on page 11 in the Company's 2005 Annual Report. During the first quarter of fiscal 2006, the Company adopted FASB 123R primarily due to the change in filing status of the Company from a small business filer to a full filer.

Executive Summary

Our results of operations depend primarily on our net interest margin, which is directly impacted by the interest rate environment. The net interest margin is the difference between the average yield earned on average interest-earning assets, primarily mortgage loans, commercial loans and the investment portfolio, and the average rate paid on average interest-bearing liabilities, primarily certificates of deposit, savings, interest-bearing demand accounts and other borrowed funds. Net interest margin is directly impacted by the spread between long-term interest rates and short-term interest rates, as our interest-earning assets, particularly those with initial terms to maturity or repricing greater than one year, generally price off longer term rates while our interest-bearing liabilities generally price off shorter-term interest rates.

Our net interest income is also impacted by the shape of the market yield curve. A steep yield curve, where the difference in interest rates between short term and long term periods is greater in the long-term time periods, could be beneficial to our net interest income as the interest rate spread between our additional interest-earning assets and interest-bearing liabilities would be larger. Conversely, a flat or flattening yield curve, where the difference in rates between short term and long term periods is lesser in the long-term periods or is shrinking over time, could have an adverse impact on our net interest income as our interest rate spread could decrease.

Our results of operations may also be affected significantly by general and local economic and competitive conditions, particularly those with respect to changes in market interest rates, government policies and actions of regulatory authorities.

During the first six months of fiscal 2006, we grew our balance sheet an additional $17.8 million, which was consistent with the growth initiatives we have employed during recent periods. This additional growth primarily reflected an $8.3 million increase in total loans and a $28.6 million increase in deposits. The growth in loans was primarily due to our continued strong levels of growth in commercial real estate loans and to a lesser extent one-to-four family residential loans. The new deposits were a result of special certificate of deposit offerings, the purchase of brokered deposits, Money Market Passbook and checking accounts.

The Company's net income for the second quarter of fiscal 2006 was $679,000, or $.30 per diluted share as compared to $.38 per diluted share earned during the same period of the prior year. The decrease in diluted earnings per share was primarily due to a 30.3% decrease in non-interest income and a 7.7% increase in non-interest expense, partially offset by the 10.5% decrease in provision for loan losses. In the December 2004 quarter, the Company recognized combined income of $153,000 after tax, or $.06, per diluted share from the sale of equities and dividends earned on those equities, with no such corresponding transactions in the December 2005 period. Net income for the first six months of fiscal 2006 was $1.4 million, or $.60 per diluted share, as compared to $.73 per diluted share earned during the same period of the prior year. The decrease in diluted earnings per share was primarily due to a 26.3% decrease in non-interest income and a 6.6% increase in non-interest expense, partially offset by the 16.3% decrease in provision for loan losses. During the six month period ending December 31, 2005, the Company recognized combined income of $257,000 after tax, or $.11, per diluted share from the sale of equities and dividends earned on those equities, with no such corresponding transactions in the December 2005 period.

Short-term market interest rates generally increased during the first six months of fiscal 2006 following the same trend of the prior one and one-half years. The Federal Open Market Committee of the Federal Reserve Bank increased the overnight lending rate 25 basis points at each of the 14 regularly scheduled meetings beginning in June 2004 to the current rate of 4.50% at January 31, 2006. Intermediate-term market interest rates and long-term market interest rates have increased approximately 40 to 60 basis points during the first six months of fiscal 2006; while short term rates increased approximately 100 basis Points. The result of these market interest rate changes was a continued flattening of the market yield curve during the first three months of 2006 and a slight inversion of portions of the yield curve during the period ended December 31, 2005. In this rate environment, our net interest margin decreased 31 basis points for the second quarter of 2006 when compared to the same period of the prior year. As our interest income, in general, reflects movements in long-term rates while our interest expense, in general, reflects movements in short-term rates. For the six month period ending December 31, 2005, our net interest margin decreased 19 basis points when compared to the same six month period of the prior year.

The Company's net income is also affected by the level of non-interest income and operating expenses. Non-interest income consists primarily of gains on the sales of available-for-sale securities, service charges, ATM and loan fees and other general operating income. Operating expenses consist primarily of salaries and employee benefits, occupancy-related expenses, postage, insurance, advertising, professional fees, office expenses and other general operating expenses. In comparing the three and six- months ended December 31, 2005 with the same periods of the prior year, non-interest income decreased primarily due to the decrease in gains realized on the sale of equities and the dividends earned on these equities. In comparing the three and six-month periods ended December 31, 2005 with the same periods of the prior year, non-interest expense increased primarily due to higher expenses for salaries and benefits, professional fees and supplies.

Subsequent to the quarter end, the Company opened a new branch in Sikeston, Missouri on January 19, 2006 and is anticipating growth between $7.5 million to $10.0 million in loans and deposits by December 31, 2006. The Sikeston branch is the first de novo type expansion the Company has completed and we estimate the branch will break even in the eleventh month of operation. We expect asset growth for the upcoming quarter to reflect historic trends, even though we are expanding into the Sikeston market. The primary funding for any asset growth is expected to come from retail deposits, overnight borrowings and brokered certificates of deposit (CDs). We intend to grow customer deposits by continuing to offer desirable products at competitive rates. We have been successful in attracting deposits in fiscal 2005 and the first six months of 2006. While it is our intention to continue to aggressively gain deposit market share in our branch footprint, we cannot be assured of this in future periods; therefore, we may become more reliant on brokered deposits in the future. We will continue to explore additional branch expansion opportunities in market areas that present significant opportunities for our business model.

Comparison of Financial Condition at December 31, 2005 and June 30, 2005

The Company's total assets increased by $17.8 million, or 5.4%, to $348.2 million at December 31, 2005, as compared to $330.4 million at June 30, 2005. Loans increased $8.3 million, or 3.1%, to $275.9 million, as compared to $267.6 million at June 30, 2005. The Company continues to focus on generating loan growth in commercial and residential loans as evidenced by commercial real estate and one-to four family residential growth of $5.7 million and $2.9 million, respectively. Cash balances increased $7.2 million, or 185.2%, to $11.1 million, as compared to $3.9 million at June 30, 2005.

Asset growth has been funded primarily with increased deposits, which have increased $28.6 million since June 30, 2005, partially offset by decreases in FHLB advances and securities sold under agreements to repurchase of $9.5 million and $2.7 million, respectively. The 12.7% increase in total deposits primarily reflects an increase in CDs of $18.2 million, which included a $7.8 million increase in brokered CDs, an $8.0 million increase in the Money Market Passbook and a $7.2 million increase in checking accounts, partially offset by decreases in money market and savings accounts of $4.0 million. The increase reflects the emphasis being placed on attracting new deposit accounts to replace FHLB overnight borrowings in a rising rate environment. FHLB advances totaled $52.0 million on December 31, 2005, as compared to $61.5 million at June 30, 2005, while securities sold under agreements to repurchase totaled $8.1 million on December 31, 2005, from $10.8 million at June 30, 2005.

Total stockholders' equity increased $732,000, or 2.9%, to $25.7 million at December 31, 2005 as compared to $25.0 million at June 30, 2005. The increase was primarily due to net income, partially offset by cash dividends paid and the decrease in market value of the investment portfolio.

Average Balance Sheet for the Three and Six Month Periods Ended December 31, 2005 and 2004

The tables on the following page presents certain information regarding Southern Missouri Bancorp, Inc.'s financial condition and net interest income for the three and six-month periods ending December 31, 2005 and 2004. The tables present the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. Yields on tax-exempt obligations were not computed on a tax equivalent basis.

13 Next Page

	For the three month period ended
	December 31, 2005			December 31, 2004
	Average Balance	Interest and Dividends	Yield/ Cost	Average Balance	Interest and Dividends	Yield/ Cost
Interest-Earning Assets:
Mortgage Loans (1)	$ 190,955,102	$ 3,146,622	6.59%	$ 181,498,217	$ 2,769,728	6.10%
Other Loans (1)	84,647,472	1,408,359	6.66	78,189,001	1,163,541	5.95
Total Net Loans	275,602,574	4,554,981	6.61	259,687,218	3,933,269	6.06
Mortgage-backed securities	15,574,390	145,200	3.73	20,011,573	186,779	3.73
Investment securities (2)	30,627,332	289,716	3.78	17,852,133	187,651	3.15
Other interest-earning assets	3,026,034	26,404	3.49	3,320,932	3,973	0.48
Total Interest-Earning Assets (1)	324,830,330	5,016,301	6.18	300,871,856	4,311,672	5.73
Other noninterest-earning assets (5)	21,096,268	-	-	22,105,867	-	-
Total Assets	$ 345,926,598	$  5,016,301		$ 322,977,723	$ 4,311,672
Interest-Bearing Liabilities:
Savings accounts	66,733,140	554,980	3.33	69,883,072	338,843	1.45
NOW accounts	28,663,430	86,837	1.21	30,471,062	75,404	0.99
Money market accounts	12,081,693	55,087	1.82	14,056,291	41,727	1.19
Certificates of deposit	121,546,574	1,060,510	3.49	85,526,857	589,100	2.76
Total Interest Bearing Deposits	229,024,837	1,757,414	3.07	199,937,282	1,045,074	1.57
Borrowings:
Securities sold under agreements to repurchase	8,903,243	81,092	3.64	6,904,846	30,334	1.76
FHLB advances	54,139,785	729,566	5.39	63,316,304	766,245	4.84
Subordinated debt	7,217,000	121,885	6.76	7,217,000	86,457	4.79
Total Interest-Bearing Liabilities	299,284,865	2,689,957	3.60	277,375,432	1,928,110	2.78
Noninterest bearing demand deposits	18,077,686	-		15,717,251	-
Other liabilities	3,031,294	-		2,936,425	-
Total Liabilities	320,393,845	2,689,956		296,029,108	1,928,110
Stockholders' Equity	25,532,753	-		26,948,615	-
Total Liabilities and Stockholders Equity	$ 345,926,598	$ 2,689,956		$ 322,977,723	$ 1,928,110
Net interest income		2,326,344			2,383,562
Interest rate spread (3)			2.58%			2.95%
Net interest margin (4)			2.86%			3.17%
Ratio of average interest earning assets to average  interest-bearing liabilities	108.54%			108.51%

(1)	Calculated net of deferred loan fees, loan discounts and loans-in-process. Non-accrual loans are included in average loans.
(2)	Includes FHLB stock and related cash dividends.
(3)	Net interest spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities.
(4)	Net yield on average interest-earning assets represents net interest income divided by average interest-earning assets.
(5)	Includes average balances for fixed assets and BOLI of $7.9 million and $6.6 million for the three month period of December 31, 2005, as compared to $8.6 million and $6.3 million for the same period of the prior year.

14 Next Page

	For the six month period ended
	December 31, 2005			December 31, 2004
	Average Balance	Interest and Dividends	Yield/ Cost	Average Balance	Interest and Dividends	Yield/ Cost
Interest Earning-Assets:
Mortgage Loans (1)	$190,994,338	$ 6,167,510	6.46%	$ 181,887,261	$ 5,530,453	6.08%
Other Loans (1)	83,274,758	2,789,165	6.70	75,273,058	2,201,539	5.85
Total Net Loans	274,269,096	8,956,675	6.53	257,160,319	7,731,992	6.01
Mortgage-backed securities	16,215,711	298,484	3.68	20,362,594	375,724	3.69
Investment securities (2)	25,955,359	480,952	3.71	19,042,219	367,703	3.86
Other interest-earning assets	3,157,519	30,188	1.91	4,648,080	7,478	0.32
Total Interest-Earning Assets (1)	319,597,685	9,766,299	6.11	301,213,212	8,482,897	5.63
Other noninterest-earning assets (5)	21,238,036	-	-	19,398,757	-	-
Total Assets	$ 340,835,721	$ 9,766,299		$ 320,611,969	$ 8,482,897
Interest-Bearing Liabilities:
Savings accounts	65,006,870	961,061	2.96	69,076,989	651,996	1.89
NOW accounts	28,405,750	172,573	1.22	30,631,374	149,685	0.98
Money market accounts	12,695,123	110,229	1.74	15,661,584	95,889	1.22
Certificates of deposit	113,817,160	1,916,250	3.37	83,458,593	1,138,435	2.73
Total Interest-Bearing Deposits	219,924,903	3,160,113	2.87	198,828,540	2,036,005	2.05
Borrowings:
Securities sold under agreements to repurchase	8,993,321	145,410	3.45	6,431,221	49,924	1.55
FHLB advances	59,248,697	1,548,598	5.23	64,122,283	1,523,713	4.75
Subordinated debt	7,217,000	237,388	6.58	7,217,000	166,935	4.63
Total Interest-Bearing Liabilities	295,383,921	5,091,509	3.45	276,599,044	3,776,577	2.73
Noninterest-bearing demand deposits	17,239,463	-		14,577,938	-
Other liabilities	2,846,838	-		2,771,927	-
Total Liabilities	315,470,222	5,091,509		293,948,909	3,776,577
Stockholders' Equity	25,365,499	-		26,663,060	-
Total Liabilities and Stockholders Equity	$ 340,835,721	$ 5,091,509		$ 320,611,969	$ 3,776,577
Net interest income		4,674,790			4,706,320
Interest rate spread (3)			2.66%			2.90%
Net interest margin (4)			2.93%			3.12%
Ratio of average interest-earning assets to average  interest-bearing liabilities	108.20%			108.90%

(1)	Calculated net of deferred loan fees, loan discounts and loans-in-process. Non-accrual loans are included in average loans.
(2)	Includes FHLB stock and related cash dividends.
(3)	Net interest spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities.
(4)	Net yield on average interest-earning assets represents net interest income divided by average interest-earning assets.
(5)	Includes average balances for fixed assets and BOLI of $7.9 million and $6.5 million for the six month period of December 31, 2005, as compared to $7.3 million and $5.3 million for the same period of the prior year.

15 Next Page

Results of Operations - Comparison of the three and six-month periods ended December 31, 2005 and 2004

General. Net income for the three and six-month periods ended December 31, 2005 was $679,000 and $1.4 million, respectively, as compared to net income of $874,000 and $1.7 million earned during the same periods of the prior year. Diluted earnings per share for the three and six-month periods ended December 31, 2005 were $0.30 and $0.60 as compared to $0.38 and $0.73, respectively, for the same periods of the prior year. Our annualized return on average assets for the three and six-month periods ended December 31, 2005 was .78% and .80%, respectively, as compared to 1.08% and 1.04% for the same periods of the prior year. The decrease in these ratios was primarily due to lower net income for the three and six-month periods and increased average assets and average liabilities. Decreased net income for the three and six-month periods was primarily due to reduced non-interest income and increased non-interest expense, partially offset by lower provision for loan losses. The increase in average assets reflects our balance sheet growth during a period of narrowing interest margins and a flattening market yield curve.

Net Interest Income. The Company's net interest income decreased for the three and six-month periods ended December 31, 2005 by $57,000 and $32,000, respectively, as compared to the same periods of the prior year. The decrease was primarily due to a decrease in the average interest rate spread. The net interest rate spread for the three and six month periods ended December 31, 2005 was 2.58% and 2.66% as compared to 2.95% and 2.90% for the same periods of the prior year. The decrease in net interest rate spread for the three month period ended December 31, 2005 resulted from an 82 basis point increase in the average rate paid on interest-bearing liabilities to 3.60%, partially offset by a 45 basis point increase in the average rate paid on interest-earning assets to 6.18% and an 8.0% increase in average earning assets. The decrease in net interest rate spread for the six month period ended December 31, 2005 resulted from a 72 basis point increase in the average rate paid on interest bearing liabilities to 3.45%, partially offset by a 48 basis point increase in interest-earning assets to 6.11% and a 6.1% increase in average earning assets. Net interest rate spread compression during 2005 was primarily the consequence of interest rates rising faster on interest-bearing liabilities than on interest-earning assets, partly due to management's decision to reduce the Bank's overnight borrowing position with higher costing fixed rate 9 - 12 month CDs. In addition, our net interest rate spread has been adversely impacted by a flattening of the yield curve as short term interest rates have risen faster than longer term rates, and increased competition for both loans and deposits.

Interest Income. Total interest income for the three and six month periods ended December 31, 2005 increased by $705,000 and $1.3 million, or 16.3% and 15.1%, respectively, to $5.0 million and $9.8 million. The increase for the three month period ended December 31, 2005 was primarily due to a $24.0 million, or 8.0%, increase in the average balance of interest-earning assets to $324.8 million and the 45 basis point increase in weighted average yields earned. The increase for the six month period ended December 31, 2005 was primarily due to a $18.4 million or 6.1%, increase in the average balance of interest-earning assets and the 48 basis point increase in weighted average yields earned. The increases in average interest-earning assets were consistent with the growth initiatives employed during the periods. For the three and six month periods ended December 31, 2005, the average interest rate on interest-earning assets was 6.18% and 6.11%, as compared to 5.73% and 5.63% for the same periods of the prior year.

Interest Expense. Total interest expense for the three and six month periods ended December 31, 2005 increased by $762,000 and $1.3 million, or 39.5% and 34.8%, respectively, to $2.7 million and $5.1 million. The increase for the three month period was primarily due to the increase in the average balance of interest-bearing liabilities of $21.9 million and the increase in the weighted average cost of funds of 82 basis points. The increase for the six-month period was primarily due to the increase in the average balance of interest-bearing liabilities of $18.8 million and the increase in the weighted average cost of funds of 72 basis points. The increases in the average balance of interest-bearing liabilities were primarily used to fund asset growth. The increase in the weighted average cost of funds was primarily due to an increase in short term rates resulting in an increase in the costs for deposits, repurchase agreements, overnight borrowings and interest costs associated with the junior subordinated debt.

Provision for Loan Losses. The provision for loan losses for the three and six month periods ended December 31, 2005 were $85,000 and $205,000, respectively, as compared to $95,000 and $245,000 for the same periods of the prior year. Although, we believe that we have established and maintained the allowance for loan losses at adequate levels, additions will be necessary as the loan portfolio grows, as economic conditions change and as other conditions differ from the current operating environment. Even though we use the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change. (See "Critical Accounting Policies", "Allowance for Loan Loss Activity" and "Nonperforming Assets").

Noninterest Income. Noninterest income for the three and six month periods ending December 31, 2005 decreased $231,000 and $382,000, respectively, as compared to the same periods of the prior year. The decreases were primarily due to the three and six month periods of the prior year's results including $233,000 and $393,000, respectively, in gains realized on sale of equity investments and dividend income received on those equities. Excluding the aforementioned net gain on sale and dividends earned on equities in the same periods of the prior year, non-interest income would have remained stable for the three month period and increased $11,000, or 1.0% for the six month period.

Noninterest Expense. Noninterest expense increased $124,000 and $213,000, or 7.7% and 6.6%, respectively, for the three and six month periods ended December 31, 2005, as compared to the same periods of the prior year. The increase in noninterest expense for the three and six month periods was primarily due to increased salaries and benefits, occupancy, professional fees, repossession expenses and supplies. As the Company continues to grow its balance sheet, noninterest expense will continue to increase due to compensation, expenses related to customer expansion, opening new branch facilities, expenditures for new technology and inflation. Our efficiency ratio, determined by dividing total non-interest expense by the sum of net interest income and non-interest income, for the three and six month periods was 60.5% and 60.2%, respectively, as compared to 51.0% and 52.7% for the same periods of the prior year. Excluding the aforementioned non-interest income, the efficiency ratio for the three and six month periods of the prior year would have been 55.1% and 56.3%, respectively.

16 Next Page

Income Taxes. The income taxes for the three and six month periods ended December 31, 2005 decreased $208,000 and $280,000, respectively, as compared to the same periods of the prior year. The decreases in provision for income taxes were primarily due to decreases in net income before income taxes.

Allowance for Loan Loss Activity

The Company regularly reviews its allowance for loan losses and makes adjustments to its balance based on management's analysis of the loan portfolio, the amount of non-performing and classified assets, as well as general economic conditions. Although the Company maintains its allowance for loan losses at a level that it considers sufficient to provide for losses, there can be no assurance that future losses will not exceed internal estimates. In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies, which can order the establishment of additional loss provisions. The following table summarizes changes in the allowance for loan losses over the six months ended December 31, 2005 and 2004:

	2005	2004
Balance, beginning of period	$ 2,016,514	$ 1,978,491
Loans charged off:
Residential real estate	(46,670)	(6,761)
Commercial business	(74,692)	-
Consumer	(87,540)	(95,193)
Gross charged off loans	(208,902)	(101,954)
Recoveries of loans previously charged off:
Residential real estate	81	5,221
Commercial	-	224
Consumer	24,064	13,367
Gross recoveries of charged off loans	24,145	18,812
Net charge offs	(184,757)	(83,142)
Provision charged to expense	205,000	245,000
Balance, end of period	$ 2,036,757	$ 2,140,349
Ratio of net charge offs during the period
to average loans outstanding during the period	.07%	.03%

The allowance for loan losses has been calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Company's loans. Management considers such factors as the repayment status of a loan, the estimated net fair value of the underlying collateral, the borrower's intent and ability to repay the loan, local economic conditions, and the Company's historical loss ratios. We maintain the allowance for loan losses through the provisions for loan losses that we charge to income. We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely. The allowance for loan losses increased $20,000 to $2.0 million at December 31, 2005 from June 30, 2005. At December 31, 2005, the Bank had $889,000, or .26% of total assets adversely classified (substandard, doubtful, or loss) as compared to adversely classified assets of $2.0 million, or .62% of assets at December 31, 2004. At December 31, 2005, the Company had classified assets of substandard and doubtful of $792,000 and $97,000, respectively.

Although we believe that we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. Although management uses the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change.

Nonperforming Assets

The ratio of nonperforming assets to total assets and non-performing loans to net loans receivable is another measure of asset quality. Nonperforming assets of the Company include nonaccruing loans, accruing loans delinquent/past maturity 90 days or more and assets, which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure.

17 Next Page

The following table summarizes changes in the Company's level of nonperforming assets over selected time periods:

Loans past maturity/delinquent 90 days or more	12/31/05	06/30/05	12/31/04
Residential real estate	$       50,000	$   130,000	$    97,000
Commercial	312,000	394,000	-
Consumer	100,000	47,000	39,000
Total loans past maturity/delinquent 90 days or more	462,000	571,000	136,000
Foreclosed real estate or other real estate owned	278,000	87,000	87,000
Other repossessed assets	12,000	7,000	11,000
Total nonperforming assets	$     752,000	$   665,000	$   234,000
Percentage nonperforming assets to total assets	0.22%	0.20%	0.07%
Percentage nonperforming loans to net loans	0.27%	0.21%	0.04%

18 Next Page

Liquidity Resources

The term "liquidity" refers to our ability to generate adequate amounts of cash to fund loan originations, loans purchases, deposit withdrawals and operating expenses. Our primary sources of funds include deposit growth, securities sold under agreements to repurchase, FHLB advances, brokered deposits, amortization and prepayment of loan principal and interest, investment maturities and sales, and funds provided by our operation. While the scheduled loan repayments and maturing investments are relatively predictable, deposit flows, FHLB advance redemptions and loan and security prepayment rates are significantly influenced by factors outside of the Bank's control, including interest rates, general and local economic conditions and competition in the marketplace. The Bank relies on FHLB advances and brokered deposits as additional sources for funding cash or liquidity needs.

The Company uses its liquid resources principally to satisfy its ongoing cash requirements, which include funding loan commitments, funding maturing CDs and deposit withdrawals, maintaining liquidity, funding maturing or called FHLB advances, purchasing investments, and meeting operating expenses. At December 31, 2005, the Company had outstanding commitments to fund approximately $32.6 million in mortgage and non-mortgage loans. These commitments are expected to be funded through existing cash balances, cash flow from normal operations, FHLB overnight borrowings and, if needed, brokered deposits. At December 31, 2005, the Bank had pledged its residential real estate loan portfolio to the FHLB of Des Moines with available credit of approximately $90.6 million, of which $52.0 million had been advanced. In addition, the Bank has the ability to pledge several of its other loan portfolios including commercial real estate, home equity and commercial business, which could provide additional borrowing capacity of approximately $66.8 million at December 31, 2005. Along with the ability to borrow from FHLB, we believe that these and other liquid resources will be sufficient to meet the Company's liquidity needs.

Regulatory Capital

The Company is subject to minimum regulatory capital requirements. Federal banking agencies have adopted regulations establishing minimum requirements for the capital adequacy of banks and bank holding companies. The requirements address both risk-based capital and leverage capital. As of December 31, 2005, and June 30, 2005, the Company and the Bank met all applicable adequacy requirements.

The FDIC has in place qualifications for banks to be classified as "well-capitalized." As of June 15, 2004, the most recent notification from the FDIC categorized the Bank as "well-capitalized." There were no conditions or events since the FDIC notification that have changed the Bank's classification.

The Company and significant subsidiary bank's actual capital amounts and ratios are also presented in the following table.

	Actual		For Capital Adequacy Purposes		To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount	Ratio	Amount	Ratio	Amount	Ratio
As of December 31, 2005
Total Capital     (to Risk-Weighted Assets)
Consolidated	32,713,000	13.47%	19,428,000	8.0%		N/A
Southern Missouri Bank & Trust	28,139,000	11.59	19,428,000	8.0	24,285,000	10.0%
Tier I Capital     (to Risk-Weighted Assets)
Consolidated	30,676,000	12.63	9,714,000	4.0		N/A
Southern Missouri Bank & Trust	26,102,000	10.75	9,714,000	4.0	14,571,000	6.0
Tier I Capital     (to Average Assets)
Consolidated	30,676,000	8.24	14,890,000	4.0		N/A
Southern Missouri Bank & Trust	26,102,000	7.68	13,587,000	4.0	16,983,000	5.0

19 Next Page

	Actual		For Capital Adequacy Purposes		To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount	Ratio	Amount	Ratio	Amount	Ratio
As of June 30, 2005
Total Capital     (to Risk-Weighted Assets)
Consolidated	31,574,000	13.42%	18,825,000	8.0%		N/A
Southern Missouri Bank & Trust	26,958,000	11.46	18,825,000	8.0	23,531,000	10.0%
Tier I Capital     (to Risk-Weighted Assets)
Consolidated	29,558,000	12.56	9,412,000	4.0		N/A
Southern Missouri Bank & Trust	24,942,000	10.60	9,412,000	4.0	14,119,000	6.0
Tier I Capital     (to Average Assets)
Consolidated	29,558,000	8.34	14,183,000	4.0		N/A
Southern Missouri Bank & Trust	24,942,000	7.76	12,849,000	4.0	16,061,000	5.0

20 Next Page

PART I: Item 3 Quantitative and Qualitative Disclosures About Market Risk
Southern Missouri Bancorp, Inc.

Asset and Liability Management and Market Risk

The goal of the Company's asset/liability management strategy is to manage the interest rate sensitivity of both interest-earning assets and interest-bearing liabilities in order to maximize net interest income without exposing the Bank to an excessive level of interest rate risk. The Company employs various strategies intended to manage the potential effect that changing interest rates may have on future operating results. The primary asset/liability management strategy has been to focus on matching the anticipated repricing intervals of interest-earning assets and interest-bearing liabilities. At times however, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the Company may determine to increase its interest rate risk position somewhat in order to maintain its net interest margin.

In an effort to manage the interest rate risk resulting from fixed rate lending, the Bank has utilized longer term (up to 10 year maturities) FHLB advances, subject to early redemption and fixed terms. Other elements of the Company's current asset/liability strategy include: (i) increasing originations of commercial real estate and commercial business loans, which typically provide higher yields and shorter repricing periods, but inherently increased credit risk; (ii) increasing loans receivable through the origination of adjustable-rate residential loans, (iii) expanding the consumer loan portfolio, (iv) limiting the price volatility of the investment portfolio by maintaining a weighted average maturity of less than five years, (v) actively soliciting less rate-sensitive deposits, and (vi) offering competitively priced money market accounts and CDs with maturities of up to five years. The degree to which each segment of the strategy is achieved will affect profitability and exposure to interest rate risk.

During the first six months of fiscal year 2006, fixed rate residential loan production totaled $13.2 million as compared to $9.8 million during the same period of the prior year. At December 31, 2005, the fixed rate residential loan portfolio was $88.0 million with a weighted average maturity of 190 months as compared to $81.7 million at December 31, 2004 with a weighted average maturity of 184 months. The Company originated $15.5 million in adjustable-rate residential loans during the six month period ended December 31, 2005 as compared to $6.0 million during the same period of the prior year. At December 31, 2005, fixed rate loans with remaining maturities in excess of 10 years totaled $72.4 million, or 26.3% of loans receivable as compared to $72.4 million, or 28.0% of loans receivable at December 31, 2004. The Company originated $55.5 million in adjustable rate commercial loans during the six month period ended December 31, 2005 as compared to $34.4 million during the same period of the prior year. Over the last several years, the Company has maintained a weighted average life of its investment portfolio of less than 3.75 years. Management continues to focus on customer retention, customer satisfaction and offering new products to customers to increase less rate sensitive deposit accounts. During the first six month period of fiscal 2006, we have offered special rate/term certificates of deposit in order to reduce the amount of FHLB overnight borrowings resulting in an increase of $18.2 million in certificates of deposit as compared to the same period of the prior year. Management has felt that the cost of overnight borrowings would continue to increase due to the predictions of the Federal Open Market Committee continuing to raise rates until the January 31, 2006 meeting; therefore, management decided to lock in interest rates during the first six months of fiscal 2006. We have increased the brokered deposits during the first six month period of fiscal 2006 by $7.8 million.

Interest Rate Sensitivity Analysis

The following table sets forth as of December 31, 2005 management's estimates of the projected changes in net portfolio value ("NPV") in the event of 100, 200, and 300 basis point ("bp") instantaneous and permanent increases and 100, 200 and 300 basis point instantaneous and permanent decreases in market interest rates. Dollar amounts are expressed in thousands.

21 Next Page

	Estimated Net Portfolio Value			NPV as % of PV of Assets
BP Change in Rates	$ Amount	$ Change	% Change	NPV Ratio	Change
+300	$   16,231	$   (13,762)	(46)%	4.71%	(4.00)%
+200	21,698	(8,294)	(28)%	6.30%	(2.41)%
+100	26,416	(3,576)	(12)%	7.67%	(1.04)%
NC	29,992	-	-	8.71%
-100	32,321	2,329	8%	9.38%	.67%
-200	33,483	3,491	12%	9.72%	1.01%
-300	34,643	4,650	16%	10.06%	1.35%

Computations of prospective effects of hypothetical interest rate changes are based on an internally generated model using actual maturity and repricing schedules for the Bank's loans and deposits, and are based on numerous assumptions, including relative levels of market interest rates, loan repayments and deposit run-offs, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Bank may undertake in response to changes in interest rates.

Management cannot predict future interest rates or their effect on the Bank's NPV in the future. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have an initial fixed rate period typically from one to five years and over the remaining life of the asset changes in the interest rate are restricted. In addition, the proportion of adjustable-rate loans in the Bank's portfolio could decrease in future periods due to refinancing activity if market interest rates remain steady in the future. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in the table. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

The Bank's Board of Directors (the "Board") is responsible for reviewing the Bank's asset and liability policies. The Board's Asset/Liability Committee meets monthly to review interest rate risk and trends, as well as liquidity and capital ratios and requirements. The Bank's management is responsible for administering the policies and determinations of the Board with respect to the Bank's asset and liability goals and strategies.

22 Next Page

PART I: Item 4 Controls and Procedures
Southern Missouri Bancorp, Inc.

An evaluation of Southern Missouri Bancorp's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended, (the "Act")) as of December 31, 2005, was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management. The Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2005, the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the quarter ended December 31, 2005, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The Company does not expect that its disclosures and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and annually report on their systems of internal control over financial reporting. In addition, our independent accountants must report on management's evaluation of its internal control over financial reporting. We are in the process of evaluating, documenting and testing our system of internal control over financial reporting to provide the basis for our report that will, for the first time, be a required part of our annual report on Form 10-K for the fiscal year ending June 30, 2007. Due to the ongoing evaluation and testing of our internal controls, there can be no assurance that, if any control deficiencies are identified, they will be remediated before the end of the 2006 fiscal year, or that there may not be significant deficiencies or material weaknesses that would be required to be reported. In addition, we expect the evaluation process and any required remediation, if applicable, to increase our accounting, legal and other costs and divert management resources from core business operations.

23 Next Page

PART II: - Other Information
Southern Missouri Bancorp, Inc.

Item 1 - Legal Proceedings

Except as set forth below, in the opinion of management, the Bank is not a party to any pending claims or lawsuits that are expected to have a material effect on the Bank's financial condition or operations. Periodically, there have been various claims and lawsuits involving the Bank mainly as a defendant, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank's business. Aside from such pending claims and lawsuits, which are incident to the conduct of the Bank's ordinary business, the Bank is not a party to any material pending legal proceedings that would have a material effect on the financial condition or operations of the Bank.

In early 2005, the Bank discovered there had been an adverse development with respect to a substandard loan, which resulted from allegedly fraudulent activities on the part of a significant borrower. The resolution of the borrower's assets has resulted in litigation between the Bank and another financial institution with non-performing loans to the same borrower as well as several other entities including the accounting firm, which performed audits on said borrower. The litigation is based on who was the rightful lien holder of various assets of the borrower. To date, we have liquidated all assets of the borrower that we were able to take possession of and have incurred charge-offs of $4.4 million. At December 31, 2005 the Bank's carrying value of this customer's assets was approximately $263,000. To the extent this litigation is settled or resolved in favor of the Bank, current balances and a portion of this write down could be recovered. The Company cannot predict whether or to what extent such a recovery may occur.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit)	Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be Purchased Under the Plans or Program
1001/2005 thru    10/31/2005	-	-	-	26,355
11/01/2005 thru    11/30/2005	-	-	-	26,355
12/01/2005 thru    12/31/2005	-	-	-	26,355
Total	-	-	-	26,355

Item 3 - Defaults upon Senior Securities

              Not applicable

Item 4 - Submission of Matters to a Vote of Security Holders

              None

Item 5 - Other Information

              None

Item 6 - Exhibits

              (a)  Exhibits

(3)	(a)	Certificate of Incorporation of the Registrant++
(3)	(b)	Bylaws of the Registrant++
(4)		Form of Stock Certificate of Southern Missouri Bancorp+++
10		Material Contracts
	(a)	Registrant's Stock Option Plan*
	(b)	Southern Missouri Savings Bank, FSB Management Recognition and Development Plans*
	(c)	Employment Agreement
		(i)	Greg A. Steffens**
	(d)	Director's Retirement Agreements
		(i)	Thadis R. Seifert***
		(iii)	James W. Tatum***
		(iv)	Samuel H. Smith***
		(v)	Sammy A. Schalk****
		(vi)	Ronnie D. Black****

24 Next Page

		(vii)	L. Douglas Bagby****
		(viii)	Rebecca McLane Brooks*****
		(ix)	Charles R. Love*****
		(x)	Charles R. Moffitt*****
	(e)	Tax Sharing Agreement***
31		Rule 13a-14(a) Certification
32		Section 1350 Certification

++	Filed as an exhibit to the Registrant's Annual Report on Form 10-KSB for the year ended June 30, 1999
+++	Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (File No. 333-2320) as filed with the SEC on January 3, 1994.
*	Filed as an exhibit to the registrant's 1994 Annual Meeting Proxy Statement dated October 21, 1994.
**	Filed as an exhibit to the registrant's Annual Report on Form 10-KSB for the year ended June 30, 1999.
***	Filed as an exhibit to the registrant's Annual Report on Form 10-KSB for the year ended June 30, 1995.
****	Filed as an exhibit to the registrant's Annual Report on Form 10-QSB for the quarter ended December 31, 2000.
*****	Filed as an exhibit to the registrant's Annual Report on Form 10-QSB for the quarter ended December 31, 2004.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		SOUTHERN MISSOURI BANCORP, INC. Registrant
Date:	February 14, 2006	James W. Tatum Chairman of the Board of Directors
Date:	February 14, 2006	Greg A. Steffens President (Principal Executive, Financial and Accounting Officer)

25 Next Page